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Law of Contracts – Part 12

In Part 1 (August 2014), I categorised risk into five categories, namely; 1. PEOPLE, 2. MONEY, 3. LAW, 4. SERVICE and 5. ECOLOGY. In this series, I deal with the risk profile of each, i.e. broadly speaking the areas of risk that any business is exposed to can been allocated under these five categories.
In Part 2, (September 2014), I covered the category of ‘People’ under four sub-categories: Staff (discussed in Part 1); Third party service providers (‘TPSP’); and Business Associates.
Part 3 (October 2014), continued with ‘PEOPLE’ as Customers.
Part 4 (November 2014), started the discussion on the 2nd category, namely ‘MONEY’ in terms of CASH and CHEQUES.
Part 5 (December 2014), looked at CREDIT and CREDIT CARDS.
Part 6 (January 2015), looked at LAW and CONTRACTS, with an introduction and Requisite #1: Offer & Acceptance.
Part 7 (February 2015), continued with Requisite #1 covering telephone enquiries, e-mails, websites and advertising.
Part 8 (March 2015), covered Requisites #2: Legally Binding Obligation, and #3: Consensus in contracts.
Part 9 (April 2015), covered Requisite #4: Performance Must Be Possible.
Part 10 (May 2015), covered Requisites #5 & 6: Performance Must Be Permissible, and Capacity of the Contracting Parties.
Part 11 (June 2015), continued with Requisites #6: Capacity of the Contracting Parties.

REQUISITE #7: NEGOTIATING A CONTRACT

We all know by now that a contract or an agreement does not have to be in writing to be binding – a verbal contract or agreement is as binding as a written one. So, why bother reducing it to writing?

You may well think that this is a job creation opportunity for the legal fraternity! Allow me to share a secret with you: by drafting a detailed written agreement you may indeed be avoiding intervention by lawyers in the event of a dispute – in fact often the best agreements are concluded by lay persons avoiding ‘legal speak’ and simply ensuring the important issues are recorded in writing. You may be saving more than legal fees – you may be saving your business and a friendship and/or a business relationship.

Agreements come in different guises: it could be for the sale of your goods or services; it could be for the provision of goods or services to your business; it could be the appointment of an agent or sub-contractor, etc. The agreement could be negotiated afresh or based on your standard terms and conditions or that of the third party or it could be a tender or RFP/RFQ.

At the outset it is imperative that the parties have consensus about the object of the agreement: the expectations and deliverables must ‘be on a par’. Parties often ‘talk past each other’ on this key aspect which is the most common cause of contractual disputes. Therefore spend some time on this aspect before moving on to the rest of the agreement.

Confidentiality is an underlying requirement and prerequisite for the parties to negotiate in detail and in good faith. It is therefore good business practice for ALL parties involved in the negotiating process to sign a confidentiality, non-disclosure and non-circumvention agreement (‘NDA’) at an early stage. The NDA ensures that everybody is ‘comfortable’, there is full disclosure and avoids misunderstandings due to insufficient facts. The NDA will remain in force whether or not an ultimate contract is concluded and if it is concluded, the NDA will be incorporated as an addendum. Sometimes the non-circumvention aspect is overlooked so be sure to address it.

Ensure that the part you are negotiating with is not only a decision maker, but is also duly authorized to enter into discussions with you AND to sign the ultimate contract. It not only saves time but also lots of frustration! Establish this as early as possible in your discussions and if there is any doubt, insist on a resolution from the legal entity the party represents or (!?) purports to represent – you may find after length discussion that you are dealing with somebody (the opposition?!) who is simply on a fact finding mission!

If there are issues of concern to either or both parties or matters that have to be resolved before an agreement can be concluded, don’t ‘walk away’ without an agreement – simply incorporate these aspects as ‘suspensive conditions’ i.e. matters that have to be resolved before the agreement is of full force and effect. It does not mean the agreement is not binding but simply that its full operation is held in abeyance until these conditions are fulfilled. A typical example is the requirement of one party to raise finance or for one party to carry out a due diligence of the other.

‘Talk is cheap but money buys the whisky’ the saying goes. Accordingly ensure that any warranties and guarantees are reduced to writing and included in your final written agreement.

Most proposals are verbose and contain fanciful descriptions of goods and services. However, the ultimate contract you may be required to sign more often than not will include a clause stating the what you are signing is the entire agreement and that any other presentations, whether in writing or not, are excluded. Thus a disgruntled buyer may find that what he was promised by the glib salesperson and what he ultimately receives are ‘worlds apart’! Avoid this by ensuring that the glossy presentation is included in your final agreement as an addendum or at least referred to.

Likewise, when you participate in a tender ensure that your standard terms and conditions (‘STC’) are incorporated in your tender proposal and response to a request for a proposal/quote (‘RFP’/’RFQ’).

One of the problems with contract negotiations is that it can take days, weeks or sometimes months to reach final agreement. What about the interim period (when the parties sometimes [Often?!] start doing business before signing anything)? There are two things I always suggest to my clients. First of all, as suggested above, sign a NDA. Secondly, sign a letter of commitment (‘LOC’). This document is also sometimes called a ‘memorandum of understanding’ (‘MOU’) or a ‘gentleman’s agreement’ or a ‘letter of comfort’ or ‘letter of intent’. Unfortunately, if not properly worded, most of these documents end up being ‘an agreement to agree’ and therefore not a binding or enforceable agreement at all. The key difference to ensure this does not result, is to have appropriate wording in the LOC stipulating inter alia that it is binding until a final agreement is signed and can also be referred to as a bridging agreement.

Why an LOC? There are various benefits, the main one being that it requires the parties to ‘apply their minds’ and gives them a chance to ‘reassess the proposed deal’. Often a brief is given to a lawyer, a lengthy and costly contract is prepared, only for the parties to find that they actually do not want to ‘do the deal’ or that, once reduced to writing, it is not really what they had in mind – and I’m not alluding to poor drafting. I simply mean that once the parties see the detail in writing and the ‘bigger picture’, it sometimes represents something ‘different’. Further benefits include giving the parties an opportunity to complete outstanding matters (e.g. suspensive conditions) by completing what I call the ‘www checklist’ i.e. ‘who what when’ and ownership of intellectual property is identified.

I would suggest that by applying the above principles parties are more likely to get what they want than with what they thought they wanted or were getting!

Disclaimer: This article is intended to provide a brief overview of legal matters pertaining to the travel and tourism industry and is not intended as legal advice. © Adv Louis Nel, ‘Louis The Lawyer’, July 2015.